On 5 July 2010, the Minister for Financial Services, Superannuation and Corporate Law released1 the final report2 of the ‘Cooper Review’ into the governance, efficiency, structure and operation of Australia’s superannuation system (Report).

This is the second issue of our special Superannuation Alerts: Review of Cooper. This alert deals with the trustee governance issues raised primarily in Chapter 2 of the Report.

The Report expresses the view that the current approach to trustee governance is no longer adequate and highlights concerns that the ‘one size fits all’ model is ‘not sufficiently flexible’ and that the unique nature of the superannuation industry is ‘overlooked’.

What will boards of trustee companies look like under the Cooper model?

Who could be a director of a trustee company?

As mentioned in our 13 July 2010 Super Alert,3 the Report endorses the idea of the establishment of the office of ‘trustee director’, with the duties, powers and standards expected of a director of a trustee company ‘recorded clearly and cogently in one place’, preferably the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).


Significant changes are recommended in the Report regarding the requirement to have ‘non-associated’ directors on trustee boards. A non-associated director is not the same as an ‘independent’ director under the SIS Act.

The Report states that a non-associated trustee-director, although able to be a fund member, would otherwise ‘need to be free of connections to, or associations with, employer sponsors, the appointer (other than by reason of the appointment itself), entities related to the trustee, employer groups, unions, service providers and should not be current or former executives of the fund or a related entity’. The Report anticipates that non-associated trustee-directors would be able to receive remuneration from fund assets but not from any third party.

The recommendations include:

  • A trustee company without equal representation must have a majority of non-associated trustee-directors.
  • A trustee company with equal representation must have no less than one-third of the total number of member representatives and employer representatives as non-associated trustee-directors.

The Report also recommends that a trustee-director be limited in their ability to act as a trustee-director on the board of more than one APRA-regulated fund, unless certain conditions are satisfied.

Equal representation

The Report recommends that equal representation, and policy committees, should no longer be mandated. This recommendation recognises the more complex nature of the superannuation industry since the inception of the SIS Act in 1993.

Board size and tenure

No express recommendations were made in the Report on board size or director tenure. However, the Report suggests that these issues would be dealt with in the proposed Code ofTrustee Governance (see below).

What is the level of competence required for a trustee-director?

Fit and proper

The Report recommends that trustee-directors should be required to meet a higher standard of care, skill and diligence than is currently the case.

The Report recommends that there be a focus on the board’s collective fitness so as to ensure a proper blend of skills. A board must not become too reliant on external advisers and must always be capable of adequately supervising their own staff. The Report anticipates that trustee-director fitness will be addressed in the Code of Trustee Governance. The Report also advocates an independent annual review of each trustee board, which would specifically address the state of the board’s collective fitness.


The Report recommends that trustee boards be allowed to establish their own expectations regarding training of trustee-directors in accordance with any requirements set out in the Code of Trustee Governance.

What will be the duties of trustee companies and trustee-directors?

The articulation of duties in the SIS Act for the new office of ‘trustee-director’ would not only clarify the duties owed by trustee-directors but also to whom these duties are owed. The Report states that it is not intended that the articulation of these duties would be a codification of general law principles.

Duties of trustee-directors

The duties of trustee-directors would focus on the issues ‘of utmost importance for superannuation fund governance’ and would include:

Duty of loyalty

The duty of loyalty is an essential duty of a trustee. It is often expressed as the duty to avoid conflicts. The Report recommends that this duty be expressly owed by the trustee company and the trustee-directors directly to the members of the superannuation fund. Presently, under the Corporations Act 2001 (Cth), directors owe duties to the company and, arguably, there is no direct duty to members.

The Report recommends the following more precise set of ‘conflict’ duties for trustee-directors in order to clarify the duty of loyalty owed by trustee-directors:

To act solely for the benefit of members, including and in particular:  

  1. to avoid putting themselves in a position where their interests conflict with members’ interests;  
  2. to give priority to the duty to members when that duty conflicts with the trustee-director’s duty to the trustee company, its shareholders or any other person;  
  3. to avoid putting themselves in a position where their duty to any other person (such as another super fund or a service provider) conflicts with their duty to members;  
  4. to avoid putting themselves in a position where their duty to any other person (other than members) conflicts with their duty to the trustee company;  
  5. not to obtain any unauthorised benefit from the position of trustee or trustee-director; and  
  6. not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee’s functions and powers.  

Section 52(8) of the SIS Act currently attempts to deal with the duties of individual directors of a trustee company by requiring a director of a trustee company to ‘exercise a reasonable degree of care and diligence for the purposes of ensuring that the trustee’ carries out the covenants. Clearly this section expands the potential for a director of a trustee company to incur personal liability. However, there has been considerable uncertainty regarding to whom these duties have been owed.

There has also been uncertainty associated with the SIS Act section 52(2)(c) duty to act in the ‘best interests’ of members. In particular, there has been debate as to whether the duty is focused on the ‘process’ in the exercise of trustee discretion or the ‘outcome’ of the exercise of trustee discretion. The most recent judicial pronouncement on this issue has confirmed that section 52(2) of the SIS Act is ‘concerned with process, not outcome’: Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363 – See our Superannuation Update June 2010.4

We would expect that any legislation would clarify that the duty is focused on the process of the exercise of trustee discretion rather than the outcome.

Duty to exercise the degree of care, skill and diligence that an ordinary prudent person of business would exercise in dealing with the property of another for whom the person felt morally bound to provide.

The Report recommends inserting the words ‘of business’ to the covenant presently set out in SIS Act 52(2)(b) to reflect the general law duty and the heightened standard which will be expected of trustee-directors. The reference to a person ‘of business’ was suggested but ultimately not incorporated into the SIS Act partly due to the equal representation requirements.

Regard to other factors

The Report recommends an enhanced duty to have specific regard to, among other matters, the likely long term consequences of any decision, including the impact of the decision on the community, the environment and on the entity’s reputation for high standards of conduct.

Duties of the trustee company

The recommended duties of a trustee company in the Report include the existing SIS Act duties to keep the money and assets of the superannuation fund separate from trustee and employer assets, to formulate and give effect to an investment strategy and a reserving strategy and to allow beneficiaries access to prescribed information. The covenant to formulate and give effect to an investment strategy, while not new, includes two new elements: the trustee must have regard to the expected costs and taxation consequences of the strategy.

The Report also recommends the following two new statutory duties for a trustee company:

  • Duty to formulate and give effect to an insurance strategy which includes the types and levels of insurance to be offered as well as the cost and value for money for members.  
  • Duty to act fairly between all beneficiaries of the fund and to act impartially between beneficiaries of the same class. This duty reflects an existing general law duty.  

Code of Trustee Governance  

The Report recommends that a Code of Trustee Governance be adopted with application to both trustee companies and trustee-directors. It is intended that this Code would be similar to the ASX Corporate Governance Council Corporate Governance Principles and Recommendations and would reflect the ‘unique context of a superannuation fund’. Among many other things, the Report recommends that this Code deal with gender equality on trustee boards, noting that ‘a goal of at least 40 per cent of directors being women would be in keeping with emerging international best practice’.

The Code is intended to be developed by industry but, if that did not eventuate, APRA would be empowered to develop it.

Trustee compliance with the Code would be audited annually and the auditor’s assessment be publicly available on each fund’s website.


The Report recommends that the enforcement provisions of the SIS Act and the Corporations Act be reviewed and ‘an appropriate proportionate penalty regime should be designed to take into account the new duties imposed on trustees and trustee-directors’.

What changes will be required to the current practices of superannuation fund trustees?


The Report strongly asserts that conflicts in the superannuation industry have to be addressed and has recommended the following additional significant changes:

  • The SIS Act should override any provision in a fund’s governing rules that requires a trustee to use a specified service provider.
  • Trustee companies, trustee-directors and management should keep a register of any benefits received which would be disclosed to APRA annually.
  • Trustees will be required to articulate and follow a conflicts policy, which exceeds the current requirements, as a condition of their RSE licence. This policy would need to address conflicts at the management level as well as at the trustee company and trustee-director level. The Report recommends that each trustee company develop a ‘conflicts matrix’ which will focus the trustee’s attention on conflicts and ‘contain a section which puts in context the trustee’s relationship with those who are involved in the operation of the fund, whether or not they are a related party of the trustee’s’.

Transparency and accountability

The Report recommends that a trustee should be required to provide reasons for any decision in relation to a member’s formal complaint.

This recommendation is a move away from traditional trust law and reflects the growing concern expressed by the judiciary and the Superannuation Complaints Tribunal with the lack of transparency in trustee decision making. Superannuation guarantee employer contributions have been generally regarded in judicial decisions as entitlements associated with employment and, as such, the traditional notion of a ‘discretionary trust’ is less relevant in the context of superannuation.


The Report recommends that sections 56 and 57 of the SIS Act continue to apply to trustee companies and trustee-directors. These sections provide a right of indemnification to trustee companies and trustee-directors respectively from the assets of the superannuation fund unless the trustee has failed to act honestly, has intentionally or recklessly failed to observe the requisite standard of care or is subject to a monetary penalty under a civil penalty order.

The Report recommends that section 197 of the Corporations Act, which sets out some particular circumstances in which a director of a trustee company may be personally liable, should be amended so that it does not apply to trustee-directors of superannuation fund trustee companies.

In order to protect fund assets from diminution by claims for indemnification, the Report recommends that appropriate indemnity insurance must be held by all trustees and that it be an RSE licence condition that trustees provide a certificate of currency annually to APRA.

What do trustees need to start thinking about now?

If the recommendations regarding governance are fully implemented, trustee boards will look quite different and trustee-directors will be held to higher standards.

The greater emphasis on conflicts means that existing trustee relationships with service providers may have to be restructured.

Trustee boards should start considering:

  • whether they would retain equal representation if given the option
  • whether the existing board would satisfy the proposed new ‘non-association’ requirements
  • if any existing director remuneration would need to be restructured
  • if the recording of reasons for the exercise of trustee discretions needs to be reviewed
  • whether directors are adequately trained, and
  • what matters they would like to see dealt with in a Code of Trustee Governance.  

While the fate of the Report’s recommendations remains unclear in the light of the upcoming election, industry endorsement of the Report may see some changes made in advance of any legislative changes. Trustees should keep the Cooper Report recommendations in mind when considering the strategic direction of their fund.